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Let's Be Frank About Fannie and Freddie


Barney Frank's idea to ensure government backing only on certain debt and mortgages will dislocate many investors and markets.

Editor's Note: This article was written by Richard Suttmeier, chief market strategist at, which is a fundamentally-based quant research firm in Princeton, New Jersey, that covers more than 5,000 stocks every day.

You Can't Have a Two-Tiered Guarantee for Fannie and Freddie

Barney Frank wants to "clarify" the government backing of Fannie Mae (FNM) and Freddie Mac (FRE) under Conservatorship. He only wants to have issuance since Conservatorship to be backed by the United States of America. What this means is that debt and mortgages dated prior to September 7, 2008, wouldn't have government backing, while those dated on September 7, 2008, and later would be backed by the full faith and credit of the US government.

You can't have a two-tiered Fannie and Freddie guarantee! I actively traded Fannie Mae and Freddie Mac debt and mortgage-backed securities off and on throughout my career in the US capital markets since 1972. If Frank gets his way, the market dislocations would be ridiculous. Investors who bought pre-dated GSE securities and mortgages because of Conservatorship will get screwed as spreads widen. GSE traders will have to check dated dates when making markets. If this idea is implemented, mortgage rates will likely spike higher.

I have often pointed to the Fannie Mae website citing that its debt isn't US-backed under Conservatorship. Here's the post as of March 3, 2010:

Fannie Mae debt securities, together with interest thereon, are not guaranteed by the United States and do not constitute a debt or obligation of the United States or of any agency or instrumentality thereof other than Fannie Mae.

Here's what it states in a CRS Report for Congress dated September 15, 2008:

On September 7, 2008, the Federal Housing Finance Agency (FHFA) placed Fannie Mae and Freddie Mac in Conservatorship. This means that the US Taxpayer now stands behind $5 trillion of GSE debt.

So which is it as you can't have it both ways? If GSE debt and mortgage securities are government-backed they should be under our nation's debt ceiling, not off balance sheet. Frank's idea could create a cascade of global selling of Fannie Mae and Freddie Mac debt and mortgages, which could push the housing market and banking system right back on the edge of the abyss.

Wasn't it about a month ago when Frank wanted to abolish Fannie and Freddie?

Back in May 2008 on Fox Business I favored the liquidation of Fannie and Freddie months before the US Treasury took them over in Conservatorship. I suggested beefing up the government-backed Ginnie Mae mortgage program, while gradually liquidating Fannie and Freddie. Instead US taxpayers are on the hook for $126 billion and counting and will be covering all losses through 2012, leaving a lifeline that could be double the current $400 billion.

By expanding the role of Fannie and Freddie the implicit guarantee has become explicit, making all GSE mortgages and debt the obligations of the US government and hence taxpayers. Wall Street and investors would have been on the hook under liquidation, not taxpayers on Main Street. It was Wall Street that sold GSE debt and mortgages to global investors stating that they were government-back, when they weren't. Exotic mortgage-backed securities and related derivatives spread around the world was described and indorsed by Fed Chairman Alan Greenspan as the way to spread the risk.

Because of Wall Street Greed US citizens are backing $5.5 trillion in GSE mortgages, and around $1.5 trillion to $2 trillion in GSE debt under Conservatorship. This must be added to the more than $14.2 trillion US debt ceiling.
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